Franchisors Financially Assisting Franchisees: Good Or Bad Idea?

The following article was posted at LSJ.com and discusses franchisors assisting franchisees froma financial standpoint in order for the franchisees to withstand the current economic crisis. But, is it a good or bad idea? Does it set precedence that will become expected at the first sign of economic trouble in the future? Will franchisors’ efforts and goodwill be used to hold them hostage in the future? Read the article and then decide for yourself. We look forward to your thoughts.

Co-signing loan papers, buying out operating contracts and modifying licensing fees are among the aggressive steps some franchisers are taking to help their franchisees weather the chilly economy.

Just like small, independent business owners, many franchisees have struggled amid a lingering credit crunch and weak consumer spending.

Their survival is important. Nationally, franchises accounted for 11 million jobs, or 8.1 percent of the private workforce, and produced $880.9 billion in goods and services in 2005, according to the most recent data available from the Washington-based International Franchise Association.

Franchisers, who license the right to operate businesses in their names, have a vested interest in continuing to attract new franchise buyers and to help their current store operators survive. Fewer franchises mean less licensing – and royalty-fee revenue, on which franchisers depend to survive.

A rash of store closures also can mar a franchise’s brand.

“I think we’re going to see a fallout in our industry just like we’re going to see a fallout in other industries,” said Jeff Johnson, founder and CEO of the Franchise Research Institute. The institute, based in Lincoln, Neb., performs surveys for franchisers that gauge their franchisees’ satisfaction.

The strategies franchisers are employing now are not unheard of even when the economy is good, Johnson said. But some of the more aggressive steps, such as buying back stores from franchisees who want out of their contracts and temporarily foregoing certain fees, are rare.

Restaurant and other food service franchisees have been among the hardest hit by the economic downturn. Health care and certain technology-related franchises still are seeing strong demand, though.

Local and national franchisers say they’re still seeing demand from prospective buyers who want to open new franchises. The biggest problem is securing credit.

“It’s like a pendulum has swung,” said Bob Fish, CEO of East Lansing-based Biggby Coffee, which has 109 franchise-owned coffee shops.

A year ago, Fish said, new franchisees easily could get loans to cover the roughly $300,000 cost to open a Biggby store – even with a company stipulation that franchisees have enough cash to cover about one-third of the cost.

Now, he said, franchisees are lucky to get loans for half the cost. “It has slowed things down, absolutely,” he said.

Fish said his advice to franchisees stays the same: Shop around for a lender.

But some franchisers have stepped in to help applicants obtain financing by being a co-guarantor for loans and lines of credit.

“We have literally done a handful of those, but it is not a big number at all,” said Lee Knowlton, chief operating officer for Scotts-dale, Ariz.-based franchising company Kahala Corp. Kahala’s chains include Cold Stone Creamery, Blimpie, Samurai Sam’s Teriyaki Grill, TacoTime and other fast-food restaurants.

One of the biggest challenges for Kahala and other restaurant franchises has been real estate.

In some instances, franchisees who moved into shopping malls and neighborhood strip centers are struggling because major tenants around them closed.

But the economy has created opportunities, too. With the real estate market in decline, there are deals to be had for commercial space to open new stores, said Brent Taylor, president and CEO of East Lansing-based TT&B Inc., which franchises toy stores.

“We’ve been able to negotiate some real estate deals with landlords that are just unprecedented with what we’ve seen,” he said.

Some franchisers have started buying back distressed stores from their franchisees or letting them be shut down.

Tropical Smoothie Cafe, a Destin, Fla.-based franchise that sells sandwiches, wraps, salads and fruit drinks, reopened two Phoenix-area franchises in the last year. “It’s the very first time that we’ve done anything like that,” said Scott Palmateer, a regional franchise consultant for Tropical Smoothie Cafe.

Delhi Township-based Two Men and a Truck International Inc. CEO Brig Sorber said failing franchises can damage the reputation of the whole system.

So, even as growth has slowed at the moving company – which added only six franchises last year – Sorber is focusing attention on improving existing operations.

The privately owned company, with about 200 locations, has been hurt by the national decline in the housing market – which means fewer people are moving.

Two Men is working on ways to help its franchisees cut costs and to get into new markets, such as moving for businesses and interstate moving, Sorber said. “There’s less moving going on, but there also are less people doing the moving,” he said.

Lansing State Journal business reporter Jeremy W. Steele and Andrew Johnson of the Arizona Republic contributed to this story.

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One thought on “Franchisors Financially Assisting Franchisees: Good Or Bad Idea?”

This is a big development. It’s obviously in the franchisor’s best interest to keep its franchises up and running. I think franchisees will only be happy to receive the help, wherever it’s coming from. Times are tough out there.